Short sales are often referred to as long sales. Many sellers, buyers, and real estate agents find that short sales may take much longer than initially expected.

So what causes delays (or perceived delays) in a short sale?

The seller does not submit the paperwork their mortgage lender requires to evaluate the short sale.

The mortgage lender’s staff is inundated or disorganized.

The mortgage lender closes the file and it must be started again from scratch.

The listing agent and the seller price the property way too high, so no one makes an offer.

The buyer backs out of the transaction.

The property loses value from vandalism, theft, frozen pipes, or deferred maintenance, which causes the buyer to walk away or demand a lower price that the lender will not approve.

The person or company negotiating the short sale for the seller is disorganized, inexperienced, inundated, or otherwise slow with the processing of the file.

The mortgage lender issues a counteroffer that forces the buyer and seller to take time to negotiate.

Another lienholder or creditor negotiates as well.

The mortgage lender loses the file.

The seller is unable or unwilling to pay certain closing costs, which forces the other parties to negotiate how to pay those costs.

The appraiser or agent sent by the lender to the property is unable to access the property on the inside.

The mortgage lender restructures or institutes new software that the staff takes time to learn.

The mortgage lender changes the locks on the property, and the seller or buyer demands access before moving toward settlement.

Emotional outbursts among some of the parties force others in the transaction to engage in time-consuming activities to defuse the rash decisions fueled by those emotions.

A private mortgage insurer is involved and therefore must also approve the short sale.

A government agency or other organization, like Fannie Mae, Freddie Mac, the Department of Housing and Urban Development (HUD), or the Veterans Administration (VA) is involved and therefore must also approve the short sale.

A seller or tenant refuses to move out in a timely manner, so the buyer delays the purchase until the house is vacant.

A title agent prepares an inaccurate HUD-1 Settlement Statement, which must be revised.

The mortgage lender’s system has a sole decision maker or influencer, and that person is away from the office at a critical moment.

Each lender has a different type of short sale approval letter.
Some are one page long, and others may be 10 pages long.

Below are phrases that indicate the remaining debt is being forgiven:

-“Under this Bank of America Cooperative Short Sale Agreement, Bank of America and/or its investors and/or insurers will accept less than the payoff balance on the above referenced property and release you from any further financial responsibility for the outstanding first lien mortgage.”

-“JPMorgan Chase Bank, N.A. agrees to release its security interests to the above collateral AND forgive any deficiency balances upon receipt of $112,168.12 in certified U.S. funds.”

-“The owner of your mortgage note, the mortgage insurer (if your loan is covered by mortgage insurance), waive their right to pursue collection of any deficiency following the completion of your short sale and your debt is considered valid.”

-“PNC Bank, N.A. will not pursue collection of the remaining deficiency balance (‘Debt Forgiveness’) after the closing, which after receipt of the Proceeds of Sale will be approximately $8,931.29.”

-“Upon receipt of certified funds, the debt will be considered to be fully satisfied for less than the amount due and no remaining deficiency balance will be owed.”

Below are phrases that indicate the remaining debt is not being forgiven:

-“Upon receipt of the funds, we also agree to release our interest in the subject property by satisfaction of the lien of record. Acceptance of this offer does not relieve the borrowers of their financial obligations of the loan deficiency and any derogatory credit reporting that may arise from it.”

-“We agree to release the lien but not the underlying note.”

-“The Bank is willing to accommodate the Borrower in releasing the Mortgage, provided that the Borrower affirms its obligation to pay the outstanding balance due, including principal, interest and any other charges, under the Note, after applying the ‘Required Proceeds’, as defined herein, to the obligations under the Note, and further provided that the Borrower otherwise fully abides by all of the terms and conditions of this Agreement. The Borrower acknowledges and affirms that following application of the Required Proceeds, the Borrower shall remain fully obligated to pay the Deficiency that shall remain due and owing under the Note, and that the Note and the Borrower’s obligations thereunder shall remain in full force and effect notwithstanding the release of the Mortgage by the Bank.”

The Protecting Tenants at Foreclosure Act of 2009 provides additional protections for certain tenants in a foreclosed residential property. The Act is effective from May 20, 2009 until December 31, 2014.

Tenants with a bona fide lease that was signed before a notice of foreclosure can reside in a foreclosed home under the terms of their lease for at least 90 days. The new owner must give a notice to vacate to the tenant at least 90 days in advance of the termination date. The tenant must pay rent under the terms of their lease, although the rent will be paid to the new owner after the date of the foreclosure sale. Some states provide additional protections to tenants in foreclosed homes.

A bona fide lease is defined in the Act as one in which:

-The tenant is not the borrower or the child, spouse, or parent of the borrower.

-The lease or tenancy was the result of an arms-length transaction in which neither landlord nor tenant has a familial or prior business relationship.

-The rent is an amount considered to be fair market rent or close to it, or the unit’s rent is subsidized by local, state, or federal funds.

Everything in real estate is negotiable, although some things are far more negotiable than others. Many lenders are willing to forgive the remaining debt on short sales involving commercial properties, vacation homes, and multi-unit buildings. The decision whether to forgive the debt or pursue the seller for a deficiency judgment is up to the lender. If the bank believes that the seller is destitute, then it does not make good business sense for them to spend thousands of dollars trying to collect money from someone who does not have it.

The bigger issue for a short sale seller of a commercial property, second home, or investment building may be the tax consequence of the forgiven debt.

If a business owner has $200,000 of debt forgiven on a commercial building, then that owner will probably be liable for paying income tax on that $200,000. If the phantom income, as it is called, is not offset by losses or expenses, then there will be a hefty tax due. $200,000 of added income in a 25 percent tax bracket means that the person could owe $50,000 to the IRS. Anyone considering a short sale should consult with their advisors about the potential tax consequences.

Make sure you read our article about the IRS insolvency exemption, titled “Do I Have to Pay Tax on my Forgiven Debt Now That the Mortgage Forgiveness Debt Relief Act has Expired?”

The Consumer Financial Protection Bureau (CFPB) introduced new rules that became effective in January 2014. Dual-tracking is a situation where a mortgage lender continues a foreclosure action against a delinquent borrower while simultaneously working with the borrower to avoid foreclosure. The new rules originated from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The problem with dual-tracking for borrowers is that many people were foreclosed upon even though their lender told them they were being considered for a loan modification, short sale, or deed-in-lieu of foreclosure. We have seen situations where a homeowner was told that their short sale was verbally approved and that a written approval was coming in the next few days. However, the bank foreclosed on them shortly thereafter, having never issued a written approval as promised. The lender’s negotiators typically take no responsibility whatsoever, claiming that they could not convince their own employer to stop the foreclosure action.

Lenders preferred to engage in dual-tracking because they could quickly foreclose on a borrower if the loan modification, forbearance, short sale, or deed-in-lieu process failed or if the process was taking too long. However, in many instances the process was taking so long because of the lender’s bureaucracy, high staff turnover, and ever-changing policies. So, the lender created the very situation that caused them to fail to make a decision on whether to approve an alternative to foreclosure.

The new CFPB rules do not prohibit dual-tracking entirely. The rules do impose some limits. The main stipulations are:

-A lender cannot initiate a foreclosure until 120 days after a borrower falls delinquent.

-A lender cannot start a foreclosure if a borrower has a pending application for a loan modification.

-A lender must give borrowers who are two months behind written notice of alternatives to foreclosure and examples of those options.

-A lender must provide delinquent borrowers with direct, easy, ongoing access to staff responsible for helping them with their application and reporting the status of an application.

-If a borrower asks for a loan modification after the 120-day delinquency period, the lender may continue the foreclosure process.

-A servicer must offer all foreclosure alternatives available from the investor or loan owner, and not just the option that is most financially favorable to the servicer.

-Lenders must consider and respond to a borrower’s application for a loan modification if it arrives at least 37 days before a scheduled foreclosure sale. If the lender offers an alternative to foreclosure, they must give the borrower time to accept the offer before pushing for a foreclosure judgment or a foreclosure sale. Lenders may not foreclose on a property if the borrower and the lender have agreed to a loss mitigation agreement, as long as the borrower abides by that agreement.

-Banks that service 5,000 or fewer loans are exempt from certain requirements.

-Lenders must provide to the borrower advance notice and pricing on force-place insurance if the lender has reason to believe that the property is no longer insured by the borrower.

We believe you should communicate with your bank on a periodic basis. If you are behind on your mortgage payment, expect up to four phone calls a day. You will also receive a lot of mail.

It is unwise to completely ignore the bank. If you do not communicate at all with your lender, they will probably put you in the category of the people who refuse to pay. That is the worst category for you, as that means they will move the foreclosure process along as fast as possible.

You do not have to answer the phone every single time the bank calls, but it is good to communicate with your lender at least twice a month. If you are considering a short sale, tell the representative. Ask them to send you the bank’s short sale paperwork package.

If you are already attempting to sell your property, then tell the person on the phone about it. Reiterate your hardship each time you talk with your lender. If you are still occupying the property, tell the lender so they do not send someone over to verify occupancy.

The 2014 President of the National Association of REALTORS®, Steve Brown, reported via his video, the number of people using the debt forgiveness exemption has increased every year. He lobbies for Congress to extend the exemption. Brown states that NAR’s best estimate is that Congress will pass some extension of this law in late 2014. Watch the video for the full details of this important update.

If property taxes are not paid, the property could be sold at a tax sale. The Pennsylvania Real Estate Tax Sale Act (RETSA) holds that all lawfully levied taxes on property constitute a first lien on the property. Delinquent taxes can be higher than the mortgage in order of priority.

Each county has a Tax Claim Bureau that collects all the property taxes. The taxes become delinquent in the year following the year in which they were due. The Tax Claim Bureau will send a notice of the delinquent taxes by registered or certified mail with return receipt to the owner’s address. If the post office cannot deliver notice, then it is prominently posted on the property.

Upset Tax Sale

The first type of tax sale is the Upset Sale. An auction is held, and the buyer takes the property subject to the claim of all recorded mortgages, liens, ground rent, claims, and tax liens from the Pennsylvania Department of Revenue. To clear the title, the buyer must pay off the amounts outstanding against the property. Some people foolishly bid on property at an Upset Sale, thinking that they can buy the property for just a few thousand dollars. What they do not realize is that there are probably many other liens and claims against the property that must be satisfied before there can be clear title. In many cases, the mortgage lender will pay the back taxes before the Upset Sale to protect their interest.

Judicial Tax Sale

If the Upset Sale cannot produce a bidder who will pay the upset price, the Tax Claim Bureau may petition the county’s Court of Common Pleas to permit a Judicial Sale. For instance, a house may have a sizable mortgage against it, causing the bidders at the Upset Sale not to bid high enough to take ownership of the property subject to the mortgage. The Court of Common Pleas can set a sale date. The high bidder at a Judicial Sale takes title to the property free and clear of all mortgages, taxes, and liens. Ground rents still remain. In most cases, the mortgage lender will pay the back taxes to prevent a Judicial Sale.

Right of Redemption

The former owner of a property sold at a tax sale could redeem the property within one year from the date of the acknowledgment of the Sheriff’s Deed that awards ownership to the high bidder. To buy back the property, the former owner must pay the amount bid at the tax sale plus other costs and any liens or encumbrances that were paid. There are some exceptions. For instance, if the property were vacant or abandoned by the former owner, then they might not have the right to redeem it.

Many short sales involve sellers who are financially struggling. That typically means the seller cut back on maintenance in recent months or years, so the property likely requires some work. For example, the seller may not have serviced the furnace, cleaned the gutters, or fixed broken items.

In a short sale transaction, a seller typically will not or cannot pay for repairs that may be customarily expected of non-distressed sellers. The property in most short sales is conveyed As-Is. A seller may even have difficulty paying for a use and occupancy certificate inspection with the municipality or a resale certificate from a Homeowners Association (HOA).

The buyer of a short sale may end up being expected to pay for municipal inspections, HOA resale fees, repairs, and other costs. In some cases, neither buyer nor seller will pay for something like a municipal inspection, with the expectation that the buyer will handle the municipal inspection later. However, if the municipal inspection discovers violations of existing code, then the buyer takes on the cost and responsibility of correcting the violations.

In some short sales, the seller may not have the utilities turned on for the buyer’s home inspection. The buyer may be expected to incur the cost and time of activating the utilities or de-winterizing the property. If the buyer does not turn on the utilities, their property inspection will be limited in scope.

In the midst of winter, buyers have to be careful about damage from frozen pipes. If the seller stops paying for heat and does not winterize the house, the pipes could freeze. The damage could occur after the buyer’s home inspection but before the settlement. If the utilities are off at the time of the closing, it may be worthwhile for the buyer to turn on the utilities and heat prior to the purchase.

Some short sales may involve trash or junk left behind. The seller may not have the money or the motivation to clean out the property.

Short sales do involve the conveyance of the property with clear and marketable title. A buyer of a short sale is strongly encouraged to pay for title insurance. Title agencies offer enhanced title insurance, which costs only 10 percent more than standard title insurance. We recommend that buyers of distressed property pay for enhanced title insurance.

Many short sales involve increased risk for the buyer. Many short sales are sold below fair market value. Therefore, buyers often pay less for a short sale in exchange for the risk they incur.